RPSM11300050 - Administrator Pages: Lifetime allowance: How the lifetime allowance is operated

What happens when the lifetime allowance is used up?

Where the amount crystallised at a BCE results in the member having used more than the available lifetime allowance the excess is subject to a tax charge, known as the lifetime allowance charge and becomes a chargeable amount.

The scheme administrator and the member are jointly and severally liable for the lifetime allowance charge except where the BCE has resulted from the member’s death – see RPSM11103610. The scheme administrator is obliged to pay any tax due to HMRC.

Where the lifetime allowance charge is triggered by lump sum death benefits being paid from the scheme it would be the recipients of the lump sum death benefit that would be liable to pay the tax charge - see RPSM11103610.

Where the member’s lifetime allowance has been fully used up the excess amount may be paid to the member as a lump sum. This is known as the lifetime allowance excess lump sum. The lifetime allowance charge on such a payment would be 55%. Alternatively, if the excess was retained in the scheme to be paid as pension benefits the tax rate would be 25% (see RPSM11105080).

The scheme administrator will need to decide whether any payment of the lifetime allowance charge is to be deducted from amounts that would otherwise have been applied as benefits. Where a deduction takes place (except in relation to payment of a scheme pension) the amount of tax is a scheme funded tax payment and itself is added to the chargeable amount. Details of how this operates are given in RPSM11105220, where a scheme pension is paid RPSM11105230 applies.